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El Paso Offers Ample Runway for Class A Multifamily Development

As land and construction prices continue to rise, developers in El Paso are targeting repositioning plays that allow residential components to be integrated into mixed-use projects. The redevelopment of the historic Blue Flame Building is a leading example of this trend in action. The project will ultimately feature 120 affordable housing units, in addition to retail and office space.

If you had to sum up the El Paso multifamily market — and to some degree the entire city — in word, it would be “steady.”

Though El Paso’s location ensures that impacts of political policies with Mexico can cause immediate disruption in the economy, our commercial real estate markets remain insulated from this activity. Even so, as the city’s jobs and population have grown in tandem with the national economic expansion, El Paso has not yet experienced a true building boom of Class A multifamily product.

Landry McKee, SVN Fortune Real Estate

The city is seeing its renter base become more gentrified, particularly on the west side. In addition, developers in El Paso face the same rising construction costs as builders in other markets. The citywide vacancy rate, which currently stands at about 8 percent, is slowly declining while average asking rents are creeping up.

These economic and demographic trends suggest the ceiling for new development of Class A multifamily product in El Paso is quite high. Absorption of new units has remained consistent during this cycle, but as things currently stand, there are only a couple hundred units under construction.

Retail Influence

Retail frequently follows rooftops, but in El Paso, the two seem to be simultaneously chasing one another. And the city’s retail real estate market is evolving, in ways that are both reflective of broader national trends and unique to the market. Again, we see this relationship on display most prominently on the west side of town, which generally has higher disposable incomes, better schools and less industrial activity.

Some big box retailers in El Paso are closing, but without creating too much excess supply in the market. For example, the 50,000-square-foot Toys ‘R’ Us on the west side closed as part of a larger bankruptcy liquidation, but the landlord has already found a tenant, to backfill the space: entertainment concept Urban Air Trampoline & Adventure Park.

Some local chains are scaling back their operations as well, but not at alarming paces. Local grocer Vista recently adjusted its store format to reflect a more boutique shopping experience and to offer products that differentiate it from Walmart, a leader in grocery market share in El Paso.

Reserve-at-Sandstone-Ranch-El-Paso

Most of El Paso’s Class A multifamily product that has been delivered during this cycle, such as the 394-unit Reserve at Sandstone Ranch on the north side of the city, has been stabilized. The market is undoubtedly ready for new construction.

Much of the newer housing product in this area can be found in mixed-use settings. Cimarron, a 200-unit property by Hunt Cos., features more than 500,000 square feet of retail, restaurant and entertainment space, as well as a 106-bed medical center that doubles as a teaching facility.

Montecillo, a mixed-use project by Richard Aguilar, has also come to symbolize the growth of multifamily in mixed-use settings. Montecillo’s Town Center features 104,000 square feet of retail space, including a grocery site, plus 20,000 square feet of office space and an entertainment anchor in Alamo Drafthouse Cinema. Additional office and retail spaces are available within the community, which also features single- and multifamily housing options.

However, it’s not just Class A product that is finding its way into mixed-use settings. One of El Paso’s most iconic projects, the $50 million redevelopment of the Blue Flame Building, a historic property that formerly served as the headquarters of El Paso Natural Gas, will deliver 120 affordable housing units upon completion in 2020. The development will also feature 30,000 square feet of office space and 7,000 square feet of retail space.

Future Outlook

Industry professionals are often flummoxed as to why more multifamily developers are not seeking and buying land El Paso. The market continues to have a strong supply of developable sites, and the combination of slowly rising rents and a dwindling vacancy rate further bolsters El Paso’s case for new housing projects.

Part of the answer lies in geography. As the city maintains its steady pace of growth, renters will eventually be pushed further from the core. But El Paso is bounded by Mexico to the south and to some degree bounded by New Mexico to the west. Having only a couple directions in which to expand can perhaps make some developers question the market’s long-term viability.

By Landry McKee, advisor, SVN Fortune Real Estate. This article first appeared in the April 2019 issue of Texas Real Estate Business magazine. 

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